‘Long way to go’ in austerity plans

The austerity programme set out by Chancellor George Osborne for the five years after the general election is tougher than in any other advanced economy, with “a long way to go” before Britain’s public finances recover from the financial crisis of 2008, a report by a respected economic think tank has found.

Under the plans set out by Mr Osborne in December’s Autumn statement, Whitehall departments face real-terms cuts of 14.1% (£51.4 billion) – after taking inflation into account – in the next parliament, on top of 9.5% (£38.2 billion) over the past five years, while the Chancellor’s aim of slicing £12 billion from the welfare budget “will not be easy”, said the Institute for Fiscal Studies (IFS0 in its annual Green Budget.

If health, schools and overseas aid are protected in the same way they have been under the coalition, unprotected departments will face cuts totalling 42% over the decade.

The fiscal targets set by the three main parties allow each of them leeway for a less painful consolidation than envisaged in the Autumn Statement, said the IFS, with Conservatives able to hit theirs by cutting 6.7% (£24.9 billion) from departmental spending, Liberal Democrats 2.1% (£7.9 billion) and Labour 1.4% (£5.2 billion) – but at the cost of more debt.

Although none of the major parties is talking about significant tax rises after the May 7 poll, the IFS warned that the first year after each of the last five elections has seen hikes totalling £5 billion at today’s prices, whichever party has won – the equivalent of hiking the main rates of income tax by one percentage point, increasing all employee and self-employed National Insurance rates by one percentage point or raising the main rate of VAT by one percentage point.

However, there was better news from Oxford Economic, which collaborated with the IFS on the Green Budget and forecast that the slump in oil prices will propel UK growth to a healthy 3% in 2015 – largely driven by consumer spending and business investment – with the economy continuing to grow at “a solid pace” over the longer term.

If their prediction is correct, the IFS calculates that less austerity will eventually be needed than currently planned.

The IFS found that the scale of cuts envisaged by the Autumn Statement results in part from the Government’s failure to deliver planned savings in public spending and social security over the past five years.

Plans originally set out by the Chancellor in 2010 implied real-terms cuts of 10.6% to departmental spending by the end of this financial year, but even by the end of next year, total Whitehall savings are not expected to have passed 9.5%.

Meanwhile, cuts in the generosity of working-age benefits have been entirely offset by higher payments to a greater number of pensioners and increasing need caused by low pay and soaring rents, leaving the overall social security budget unchanged.

The Conservatives’ planned two-year freeze on non-disability working-age benefits will deliver only £2.5 billion of their planned £12 billion welfare cuts – less than the £3.2 billion estimated by the Treasury – said the IFS.

Even a freeze on all benefits and tax credits other than pensions would only just pass the Tory target, saving £13 billion over five years – the equivalent of taking £800 from 16 million families.

While Labour’s target of balancing the current budget could be achieved with “substantially smaller spending cuts”, it would slow the pace of repayment of Britain’s national debt, said the IFS.

If Labour stuck to its target through the 2020s, debt would fall by 9% of GDP, compared to 19% under Conservative plans to balance the books overall.

IFS analysis of forecasts from the International Monetary Fund (IMF) found that while some countries have implemented much bigger austerity packages than the UK since 2008, the “fiscal consolidation” currently planned by the UK for the period 2015-19 is the largest out of 32 advanced economies around the world.

IFS director Paul Johnson, an editor of the Green Budget, said: “Mr Osborne has perhaps not been quite such an austere Chancellor as either his own rhetoric or that of his critics might suggest.

“He deliberately allowed the forecast deficit to rise as growth undershot in the early years of the Parliament.

“He has not cut spending in real terms as much as planned, as inflation has undershot. And he has cut departmental investment spending by only half as much as he originally planned.

“One result is that he or his successor will still have a lot of fiscal work to do over the course of the next Parliament.

“The public finances have a long way to go before they finally recover from the effects of the financial crisis.”